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In April 2013, the liquidators of Akron Roads Pty Limited (in liq) (Akron Liquidators) commenced proceedings against three former directors including Trevor Crewe (an Akron Director) and Crewe Sharp Pty Ltd (an alleged de-facto director) (the Directors) for breaches of the insolvent trading provisions of the Corporations Act 2001 (the Act).

The Directors made a claim on a professional indemnity policy with CGU in relation to the claim and were denied indemnity on the basis of certain exclusions under the policy.

In circumstances where Mr Crewe had limited assets to cover the claim brought against him, and Crewe Sharp went into liquidation, the Akron Liquidators sought and obtained leave of the Victorian Supreme Court to join CGU to the proceedings so that a declaration could be sought that CGU was liable to indemnify the Directors under the policy.

JUDGMENT AT FIRST INSTANCE

By reference to s 562 of the Act, and the analogous provision in s 117 of the Bankruptcy Act 1977 (Cth), which provides a third party claimant with a right to the proceeds of an insurance policy payable to an insured, Judd J allowed the joinder of CGU noting:

the Akron Liquidators had a sufficient interest in the proceeds of insurance to provide them with standing to apply for declaratory relief; and

a justiciable dispute existed between the Akron Liquidators and CGU consequent on the denial of liability under the policy.

Judd J observed that such an approach would be consistent with the overarching purpose of the Civil Procedure Act 2010 (Vic) as allowing for the “just and convenient” resolution of the entirety of the dispute in the same proceeding.

ON APPEAL

CGU appealed on the ground that his Honour had erred in law in joining it as a defendant to the proceedings because the court had no jurisdiction to entertain a claim by a stranger to a contract between two private parties concerning the meaning and effect of the contract.

The Court of Appeal dismissed the appeal noting that Australian case law supported the proposition that, in exceptional circumstances, a court will permit a plaintiff who is not a party to a contract to seek a declaration as to rights existing under that contract. The Court placed emphasis on the “practical utility” of joining the insurer and resolving the matter in which the plaintiff had a “real interest”.

CGU was granted special leave to appeal to the High Court on the grounds that the Court lacked jurisdiction to entertain the claim by the Akron Liquidators against CGU. Ultimately, the question to be asked was whether that claim was part of the matter in which the Akron Liquidators claimed against the Directors.

HIGH COURT PROCEEDINGS

In a joint judgment, French CJ, Kiefel, Bell and Keane JJ held that whether or not the Supreme Court had jurisdiction to hear the claim, and power to grant the relief sought, depended on whether there was a “justiciable controversy” between the Akron Liquidators and CGU.

In reaching a conclusion, it was noted that:

if the Akron Liquidators made good their claim against the Directors, and established the liability of CGU to indemnify its insured, the proceeds of the policy would have been payable to them as a result of the operation of s 562 of the Act and section 117 of the Bankruptcy Act;

because of these statutory provisions, in all practical respects, it was the Akron Liquidators who stood to benefit from the outcome of any findings made; and

this interest, in combination with the denial of liability under the policy, was sufficient to constitute a “justiciable controversy” between the Akron Liquidators and CGU.

As such, it was held that the Supreme Court had jurisdiction to hear the claim, power to grant the relief sought and the appeal was dismissed with costs.

Nettle J, in a separate judgment, also dismissed the appeal for similar reasons, adding that while the court may be precluded from making a declaration with respect to the meaning and effect of a contract at the suit of an “outsider”, the Akron Liquidators, given their potential entitlement to the proceeds of the policy, could not be regarded as outsiders in any rational sense of the word.

This decision represents a sensible approach and is good news for liquidators who, with the insurance company joined from day one, are able to ensure all issues are dealt with at once in the one proceeding in a manner that binds all parties to the outcome.

This significantly reduces the risk of fruitless litigation in circumstances where a plaintiff is successful as against a defendant, though unsuccessful in their pursuit for indemnity.